Medina

AUSTIN – Texas overtaxed seismic scientists at TGS-NOPEC Geophysical in Houston by $1,394,748, Supreme Court Justices ruled on May 27.

They ordered comptroller Susan Combs to refund that much to TGS-NOPEC, plus $333,741 in penalties and interest.

TGS-NOPEC gathers data from below earth's surface and licenses it to customers evaluating oil and gas formations.

The Justices found that in applying business franchise tax law, Combs confused receipts from licensing with receipts from use of a license.

Justice David Medina wrote that "license" has more than one meaning.

"As such, its use in the statute is ambiguous," he wrote.

"The word 'use' poses some interpretational difficulties as well because of the different meanings attributable to it," he wrote.

Searching for context, he compared seismic data to patents and copyrights.

"The revenue or royalties that the patent owner receives is included in Texas receipts to the extent that the patent is used in production, fabrication, manufacturing, or other processing in Texas," Medina wrote.

"Even though a license is part of this transaction, the receipts are from the use of the underlying intellectual property, the patent, not from the use of the license.

"Revenue the copyright owner receives from the use of its copyright is included in Texas receipts to the extent the copyright is used in Texas. Even though a license is part of this transaction, the receipts are from the use of the underlying intellectual property, the copyright, not from the use of a license.

"In these two situations, the owner of the intangible asset uses a license to convey limited rights to its intellectual property."

He wrote, "But the revenue produced is not from the use of a license in Texas; it is from the use of the underlying intellectual property, the copyright or the patent.

"Similarly, the revenue TGS receives from conveying its geophysical data is not derived from the use of a license but from the use of the underlying intellectual property, the data."

For years, comptrollers characterized a TGS-NOPEC license as sale of an intangible and allocated the revenue to the customer's domicile.

In 2004, comptroller Carole Keeton Strayhorn audited TGS-NOPEC for the previous seven years and characterized the revenue as receipts from use of a license.

"This determination is significant because receipts from the use of a license are allocated to Texas if the license is used in Texas, whereas receipts from the sale of an intangible sold and used in Texas are not allocated to Texas, if the payor's domicile is elsewhere," Medina wrote.

TGS-NOPEC paid taxes, penalties and interest, all under protest, and sued Strayhorn in Travis County.

District Judge Gisela Triana-Doyal approved the taxes but ordered Strayhorn to refund penalties and interest.

Third District appeals judges in Austin affirmed her, but the Supreme Court reversed her.

Medina wrote, "TGS grants its customers a license, or a limited right, to use its seismic data."

He wrote, "The customers, however, then use the seismic data and not the licenses that vest in them as a result of the licensing transaction."

James McBride represented TGS-NOPEC.

Attorney General Greg Abbott represented Combs, along with William Storie, Christine Monzingo, Kevin Van Oort, Clarence Weber and David Morales.

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